Friday, May 31, 2013

Laws are ink on paper, as argued by the chief economist of the World Bank, Kaushik Basu. What he means is that the fact that laws prescribe something does not automatically change the incentives of agents affected by the law. To be effective, laws must be enforced, and the enforcers must find it in their interest to apply the law. At most, laws can be focal points that make it possible for individuals to coordinate around one particular course of action among many. But in general there is no guarantee that individuals will coordinate around a legal focal point as opposed to some other focal point, arising for example from tradition or from violence. Important institutions may be formal as well as informal, as it has been argued by institutional economists such as North, Greif or Aoki. The latter has been the one that has most emphasized the importance of words, in the sense that words facilitate the cognitive salience of features of institutions that sustain individuals' beliefs. The relationship between institutions, laws and language has also been stressed by the philosopher John R. Searle, for example in his book "Making the Social Order. The Structure of Human Civilization." In practical terms, in my view the lesson of this is that it is very incomplete to suggest policy reforms that are merely based on legislative changes, which has implications for issues such as political reform, the fight against corruption or the legal creation of new institutions.

Friday, May 24, 2013

A group of
American and Swedish economists lead by Harvard professor Richard B. Freeman
published in 2010 an analysis of the reforms undertaken by Sweden to recover
from an acute financial crisis in the early 1990s. Against all forecasts, these
reforms were rapidly successful, and allowed Sweden to recover the balance in
the public accounts, to increase productivity and to rapidly restart economic
growth, at the same time as keeping a large welfare state and high fiscal
pressure. Many of these reforms included short term painful measures such as
reducing the benefits of unemployment insurance and the pension system. Perhaps
the most important lesson for other countries from the Swedish experience is
that it isn’t easy to be Sweden, or as the economists like to say, there is no
free lunch. But the experience proves that it is possible to fight against a financial
crisis and at the same time keep intact the essence of the welfare state and
the institutions that make it possible to fight poverty and inequality. Sweden
was helped by the fact that it had its own currency (which was left to free
float) and by economic growth of its main trading partners, but many of the
reforms had to do with policies that can be implemented by any country, and
that try to find the best combination of economic efficiency and social
justice. Not by coincidence, Nordic countries, having been exposed to social
democratic policies for decades, are at the top in the rankings for income per
capita, income distribution, low corruption, respect for the environment and
many other good things. The challenge is to apply the same principles and
similar policies to societies that are larger and less homogeneous. It will not
be easy, but there is no better example to follow.

Sunday, May 19, 2013

I taught a
three hour lecture on introductory economics to journalism students last
Friday. Besides being a great pleasure (why do they call it teaching “load”?), the lecture included explaining to prospective journalists the meaning of the “multiplier”.
As textbook, we used the updated version (in its Spanish translation) of
Krugman, Wells and Graddy. By the multiplier, when government spends 1 euro in
public investment, this has an impact on the gross domestic product (the value
of production, which is the same as income) of more than one euro. Why is that?
Because this euro produces by itself some good of service (which is part of
GDP), but it also goes to the pocket of someone (a public sector worker, for
example), who spends it in part (depending on the ratio of income that is spent
and saved) on some good or service. This also goes to the pocket of someone,
who also spends a fraction of it, and so on. Conversely, when government cuts spending by
one euro, this has a more than one euro impact in the reduction of GDP. Of
course, the cost of public spending is that taxation is usually distortionary,
or that high debt has economic costs. It is then an empirical issue to compare
the effects of increasing or not reducing public expenditure with the costs of
taxation of debt. But it is official (at least in the textbooks, that is, it is
also the orthodox thing): the multiplier does exist. I finished by recommending
to my students that they read the recent article by Paul Krugman in the NewYork Review of Books on the promoters of austerity who decided to forget about
the multiplier.

Thursday, May 16, 2013

As
previously pointed out in this blog, experts and policy makers have their own
biases. French scholars Yolande Hiriart and David Martimort explore these
biases (in the field of risk regulation) in a forthcoming article in Annales d’Economie
et Statistique. The study of these biases is a crucial ingredient of the current debate about the limits of technocracy. The article also includes interesting thoughts about the limits
of cost-benefit analysis as it is usually performed. This type of analysis does
not take information rents into account, that is, the rents that are necessary
to induce the revelation of private information by firms involved in public
projects, for example in the context of public-private partnerships. The presence
of these rents requires the introduction of distributive criteria, which
contradicts the exclusive use of efficiency criteria and the isolated analysis
of projects. The isolated analysis of efficiency also tends to ignore issues
related to dynamic learning in the public sector and in democratic societies,
which may be more important than the strict optimality of a given project,
according to the theses of “pragmatism” espoused by the American philosopher
John Dewey. This criticism seems to go beyond the criticism raised by
environmental groups against cost-benefit analysis for not giving enough weight
to catastrophic states of the world even when these have low probability, but
in my view it also suggests that cost-benefit analysis should be expanded to
take into account all these considerations, rather than be abandoned.

Wednesday, May 8, 2013

The web on PPPs of the Public-Private Sector Research Centre of the IESE business school is now public. A great deal of information on centres, publications and research tools on this important topic can be found in it. These partnerships are acknowledged to be an important source to improve the efficiency of public services, especially when they are combined with an infrastructure. Since private incentives work better in projects with a low number of dimensions, private operators can be focused on specific projects for a given time period under the control of public objectives. This tends to work better than full blown privatization. Of course, PPPs are no panacea, and they must be well designed and regulated, and they must avoid the risk of unfair and inefficient renegotiations. An important problem with them is the existence, potential or suspicion of corruption, as was explained yesterday by Elisabetta Iossa in an interesting workshop on this topic at IESE.

Sunday, May 5, 2013

I started reading
the papers and books by Jared Diamond as a result of his review of “Why Nations Fail,” the book by Acemoglu and Robinson. Since then, I read his most recent
book, “The World Until Yesterday” (about what we can selectively learn from primitive societies) and now I’m reading the previous one, "Collapse." The
latter contains a chapter about the environmental (complete deforestation) and
social collapse (leading to violent changes of leadership and cannibalism) of
Easter Island prior to the arrival of expeditions from European origin. This
Pacific island had the worst geographic conditions in terms of those that
facilitate overuse of natural resources. Although the deep reasons of the
collapse are geographical (enormous physical distance from other societies,
temperature, soil conditions), the irreversible decline was accompanied by
destructive competition among clans (which led to the construction –requiring the
employment of huge amounts of resources- of those ever bigger giant sculptures,
or moais). Diamond notes that there
is a potential metaphor about the likely fate of our planet, which cannot rely
for help from other civilizations. I note another interesting analogy:
worsening environmental conditions coincided with identity wars and social
disruption. Social, environmental and “national” issues cannot be artificially
separated.